The New Arthurian Economics

Tuesday, December 24, 2013

A student, explaining why abstract models are useful, makes a very nice analogy. If you want to go from one campus of the Berlin School of Economics to the other (by car or public transport), then you need not a description of the world as it is but a description of the world in an abstract form that allows you to get there.

A map. You need a map.

Ehnts gets to the point:

The same goes for macroeconomics. It is not necessary to understand and know how every entity behaves. You can use abstractions and you will be fine. Income (GDP) equals consumption, investment, government spending and net exports, and maybe this is all you need to figure out how to go from Weak economy to Strong economy.

Maybe that's all you need, Ehnts says. I can't believe he says it. We had that formula, didn't we, before the Crisis and the Great Recession? I'm sure we had it then. But it didn't prevent the Crisis, and it didn't prevent the Great Recession. Apparently it wasn't all we needed.

In Star Trek: Next Generation, when they had a problem they couldn't figure out, they'd take it to the Holodeck and run a simulation. As a fan, I was supposed to believe the computer could figure out things the people couldn't. I never bought that. The computer only does what you tell it.

If you write an economic model for the Holodeck based on Y=C+I+G+NX then the Holodeck economy will be based on consumption and investment and government spending and net exports. But if the real economy is based on a different formula, your model won't model the real economy. You might as well use a road map without intersections. No no, that map might still get you where you want to be.

Maybe if economists focused less on the models and more on the economy, they would figure out how the economy really works. Maybe then they wouldn't leave private debt and credit use out of their calculations.